In Part 1 of Three Ways to Produce Positive ROI in Half the Time or Less, we discussed the traditional method for building a winery and vineyard from scratch and reviewed cash flow from year 1 through year 10. We saw that, if starting from scratch and planting a vineyard, making wine from your own grapes and setting up a tasting room, the winery will not reach a positive cash flow for nearly 10 years. This route is hard, physically, mentally and financially. By the time you’re actually making some money, your idyllic dream of owning a winery has been trampled by brutal reality.

If you break it down, building a winery the traditional way is actually three separate businesses: growing grapes, making wine and retailing. With the traditional model, you are investing in all three and the overall time for making a return is 10+ years, when if you just choose one, you could gain a return much sooner.

Today, let’s look at what you could do if you just grew grapes. You can look back at Part 1 of this series and compare what’s happening in the same years in the traditional way.

Year 1: Buy your land*, vines, tractor, trellis, irrigation, fertilizers, etc and plant your vineyard. A good rule of thumb for vineyard establishment is a cost of $10,000 – $15,000 per acre, not including the cost of the land. For our discussion, let’s say a 25 acre vineyard and a loan of $300,000.

Year 2-3: Vineyard is growing. It costs about $3,000 per acre each year to maintain and grow the non-producing vines. Maintenance at $3,000/acre for two years = $150,000. Now you have invested about $450,000.

Year 4: You have a crop at ⅓ of it’s full production, which you sell at $1,000/ton. You have 30 tons (slightly better than 1 ton/acre). Your gross income is $30,000. Now that you are producing grapes, maintenance increases to $4,000 per acre ($100,000 total). You also invest another $50,000 in fixed assets (bird netting, picking bins, etc.). Gross income of $30,000 less $150,000 equals a investment of $120,000 for the fourth year and a total of $570,000.

Year 5: Now you are producing ⅔ of your vineyard’s capacity and you make $60k. No extra investment in equipment this year and maintenance costs decrease a bit to $3500/acre, so your investment this year is $27,500. That’s $597,500 total investment.

Year 6: You are in full production at $100,000/year. Less $3,500/acre maintenance ($87,500) for a return of $12,500. If you are working the vineyard, your salary is from the labor portion of maintenance costs.

This gives an ROI of 2.1%. Not great, but you could possibly increase revenue and volume of crop due to experience and proven quality. If your per ton price goes up to $1,250 while maintaining the crop level, the ROI jumps to 6.28%.

A winery can be approached similarly. A 10,000 case winery (which is pushing small winery equipment to the limit – larger volume wineries need much higher cost capital equipment to handle the volume) can produce an ROI of 7-8% once sales match production (i.e. 10,000 cases per year for both). By purchasing grapes from established vineyards, a winery can skip the investment in assets and time necessary to establish a producing vineyard and begin making wine in year 1 instead of year 4 as we discussed in the first section.

Note: One of the mistakes many growers make is that they are working with too few acres. Fixed overhead costs will be too great to break even if you only have a few acres. You need to have enough acreage producing enough grapes to outweigh the fixed costs to produce a positive ROI. For most, 25 to 35 acres is the minimum necessary to be profitable growing grapes only. Doing this type of strategic planning will make a huge difference in your business.

*If you are a farmer who already has land, tractor, equipment and crews, and all you need are vines and trellis, then that will cut costs and investments significantly, producing a positive ROI sooner.

In the next section we’ll look at a strategy for a winery to have cash flow in the first year of operation, and accelerate ROI significantly.

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